Title: Empirical asset pricing with score-driven conditional betas
Authors: Julien Royer - CREST (France) [presenting]
Thomas Giroux - CREST (France)
Abstract: A novel empirical asset pricing framework is introduced based on the newly introduced score-driven conditional betas model. We extend the theory of the studied conditional betas by establishing the asymptotic distribution of standard test statistics for parameter constancy in conditional regression. In particular, these tests allow for assessing the significance of a given factor in the regression. We then propose a two-step estimation procedure to recover time-varying factor risk premia from individual stock returns. We illustrate the performance of our tests and risk premia estimation procedure on simulations. Finally, we present an application where we assess the existence of a time-varying risk premium associated with a carbon risk factor in the cross-section of US industry portfolios.